The moves to take in order to help firms ride economic wave

June 22, 2021 | 16:57
The prolonged pandemic is negatively impacting businesses because of reduced demand for goods and services due to shutdowns and resulting declines in employment and incomes; falling output due to labour constraints and supply chain disruptions; and tightening of credit and declining investment due to increased uncertainty about the duration and impact of the pandemic.
The moves to take in order to help firms ride economic wave
The moves to take in order to help firms ride economic wave - illustration photo

The government can best help businesses by continuing its remarkable success in limiting the spread of COVID-19. The challenge now is to source vaccines and quickly vaccinate the population as supplies become available. This should remain the highest priority.

Recent global success in containing the pandemic means that there are now much improved prospects for global economic recovery. The World Bank recently projected global growth of 5.6 per cent in 2021.

A key question for policymakers is: What more can Vietnam do to help firms benefit from the expected improvement in the global economy?

When the pandemic first started to impact the global economy, governments initially focused on actions to retain jobs and limit firm closures. Policy actions were directed at quickly increasing spending and liquidity to sustain investment and employment, and measures to reduce business costs to stimulate investment.

The urgent adoption of such measures was mostly effective, but government programmes did not always reach those most in need of support.

A recent World Bank blog reported that globally, 20 per cent of businesses that did not experience any negative shock due to COVID-19 reported receiving public support, compared to 26 to 29 per cent of firms that were affected. In addition, smaller and female-owned businesses were less likely to receive assistance. Shortcomings in targeting initial support was to be expected given the urgent need for action.

Now that the worst of the global economic shock appears to be receding, policymakers can focus more on medium- and long-term concerns and priorities needed to sustain economic recovery to improve wellbeing.

There are no assured models for directly supporting businesses to help them recover from economic shocks. Governments have limited resources and need to ensure that these resources are used efficiently and equitably, and this can be difficult to achieve.

Providing direct government-to-business support is often inefficient and inequitable. Such support tends to favour larger and better-connected firms. Tax relief and support through formal financial mechanisms may not reach the smaller firms that are most in need in countries with a large informal sector.

Increased expenditure on schemes that reach disadvantaged groups will generally have the greatest stimulatory impact because such recipients are more likely to spend most of the support received, creating increased demand for goods and services.

Social protection and cash transfer programmes provide a more direct way to reach working families and can help sustain demand for business goods and services. Even modest increases in minimum wages for the lowest paid civil servants could have stimulatory impacts.

Even in the current uncertain environment, there remains considerable scope to further reform and develop Vietnam’s business and trade related institutions to achieve policy objectives more effectively at lower costs to consumers, workers, and producers. Regulatory and administrative reforms can help firms and boost competitiveness, productivity, and employment and, thus, help mitigate pandemic impacts and accelerate economic recovery.

The government could continue to build on recent progress in accelerating public investment in physical infrastructure and human capital. Sustained efforts to efficiently boost public investment will directly help stimulate national demand, while also building the foundations for sustained longer-term economic growth.

Manufacturing linked to regional production is expected to be an important source of future productivity and employment growth. The development of manufacturing hubs is linked to accelerated urbanisation. Well planned urban infrastructure can facilitate the positive outcomes from these trends and help mitigate potential adverse impacts on the environment and people’s health.

The challenge is to target support to sustain the operations of those firms that are both most in need and potentially financially viable. Not all firms are struggling. It is important to avoid unnecessary support flowing primarily to the best-connected firms.

Support may be needed to sustain critical value chains throughout lockdowns (for instance transport/logistics, food, and other healthcare products and services).

Businesses may need to look at new ways to reach customers, ensure more resilient supply chains, review workplace design, and to make greater use of digital and IT at all stages of the business cycle.

Support could be designed to encourage and support adoption of digital tech and e-commerce, including skills development. Policymakers can explore how to increase the impact of new technologies by strengthening digital links between government and business and increasing public sector use of digital services.

It would be inefficient and unproductive to provide support to keep non-viable firms operational. Rather, further reforms may be needed to facilitate the timely liquidation of non-viable firms. Government support in such cases could be directed at supporting the workers from non-viable firms, and to helping the firm to liquidate and/or move resources into new viable opportunities. The provision of skills training and information can be important for non-viable firms and their workers.

Short-term targeting of training and financial support to protect jobs and businesses in regions and sectors (for example tourism and hospitality) worst impacted by COVID-19 may also be desirable.

By Raymond Mallon - Senior economic expert

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